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What's a Cancer Drug Worth?

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Sorting out the high cost of cancer drugs is creating confusion among investors. Is a $100,000 treatment per patient too much?

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Seattle Genetics (SGEN) spent a dozen years and hundreds of millions of dollars to develop its new cancer drug Adcetris. Some drugs take even longer from discovery to approval, costing well more than $1 billion.

So when Seattle Genetics studied pricing the drug, company execs had to weigh those investments in addition to the market for the treatment, which was approved late last week fort the blood cancers Hodgkin's lymphoma and anaplastic large cell lymphoma, or ALCL. The six-figure price -- it may exceed $120,000 per patient -- is raising concern among investors. (See Seattle Genetics Slaps Big Price on New Cancer Drug)

But from an innovation and investment standpoint, Seattle Genetic's price is justified, says biotech industry consultant Michael Becker.

Whether a company is developing a drug for a big patient pool or a small one, the cost of developing the medicine is the same.

The challenge for Seattle Genetics is to convince doctors and insurers that the price is actually right and maybe even a value to the health care system. Adcetris targets tumors in patients who don't respond to existing therapies (a type of stem cell treatment and chemotherapy). So it's treating a subset of a relatively small patient population. Other drug makers are zeroing in on genetic causes of disease. For instance, Roche's new melanoma treatment Zelboraf (priced at more than $56,000 per treatment) targets a genetic mutation linked to cancer.

"If you have a drug that can be screened or personalized to only those patients that are going to respond, you are saving money for the health care system," Becker says.

Adcetris joins Bristol-Myers Squibb's (BMY) new melanoma drug Yervoy and Dendreon's (DNDN) prostate cancer vaccine Provenge as a new cancer treatment that costs about or more than $100,000 per patient. Provenge costs $93,000 per regimen while Yervoy is priced at about $120,000.

"It does appear that the average annual cost for newer oncology products is around $100,000," Becker says.

So far, Yervoy's high price isn't damping sales. In its first quarter on the market, Yervoy posted $95 million in sales. Provenge, approved in 2010 but initially hampered by manufacturing constraints, is a different story. The company's admission that sales badly missed forecasts -- with less than $50 million in product revenue last quarter -- tanked its stock earlier this month. The company also withdrew its revenue forecast. (Seee Dendreon's Stock Plunges on Low Provenge Sales)

Dendreon blamed tepid sales on reimbursement concerns among doctors in clinics. Provenge is a vaccine that triggers the immune system to fight cancer. It's approved for men in the advanced stages of cancer and is administered in three infusions over a six-week time frame.

Dendreon CEO Mitchell Gold used the term "cost density" in explaining the problem with sales. Translation: Doctors have to administer a very pricey drug regimen over a short period of time, causing the physicians anxiety about getting paid by Medicare and private insurance companies. (Also read What Dendreon Can Learn From Robots)

The key to figuring out whether the company you've invested in is overcharging for its drug, is to consider the patient population and the uniqueness of the treatment.

Seattle Genetics has a drug that better targets tumors in a narrowly defined patient group. Dendreon is competing in a crowded field of prostate cancer treatments. Another company, Allos Therapeutics (ALTH), raised eyebrows when it priced its drug Folotyn for a type of cancer known as peripheral T-cell lymphoma. The drug is priced at $30,000 a month. In the second quarter, that drug posted $11 million in sales compared with $7.9 million for the year-earlier period. Having been on the market for more than a year, those sales are not exactly robust for a cancer treatment.

Twitter: @brettchase
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No positions in stocks mentioned.
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